Goldman Sachs will invest almost $10 million in a city jail program that will produce profits for the investment firm if recidivism rates drop, marking the first U.S. effort of its kind to enlist private investors in financing public social programs, officials said Thursday.
Known as social impact bonds or pay-for-success contracts, such initiatives began in Britain and are in the works in some U.S. state governments. But New York City is the first in the nation to put one together, officials and experts said.
Inmates ages 16 to 18 will receive education, training and counseling intended to reduce the likelihood of them reoffending after their release.
"New York City is continually seeking innovative new ways to tackle the most entrenched problems, and helping young people who land in jail stay out of trouble when they return home is one of the most difficult and important challenges we face," Mayor Michael Bloomberg said in a statement.
About 5,000 inmates ages 16 to 18 come through city jails each year, Correction Commissioner Dora B. Schriro said. Nearly half of the adolescents who leave city jails return within one year.
Goldman will provide $9.6 million to pay for the program at the Rikers Island jail complex. The firm will get back the $9.6 million if recidivism dips by 10 percent and as much as $2.1 million in profit if the reoffending rate declines more.
If recidivism doesn't fall by at least 10 percent, Goldman will lose as much as $2.4 million. The mayor's personal foundation, Bloomberg Philanthropies, is providing a $7.2 million loan guarantee that can be used to repay the rest of Goldman's investment.
"We believe this investment paves the way for a new type of instrument that enables the public sector to leverage upfront funding from the private sector," Goldman CEO Lloyd Blankfein said.
In general, social impact bonds work like this: Private investors put up money for a program with a specific goal. If it's achieved, the government pays back the investors, with a profit. If not, the government pays nothing.
Such bonds offer investors a potential return on their money and give government cash upfront to start a new initiative. And if it succeeds, the theory goes, taxpayers save money, spending less to curb recidivism than to keep jailing repeat offenders, for example.
The approach "offers a way to speed up progress in addressing social problems, to focus attention on improving performance on government-financed social services, and to do so in a way where the taxpayers are on the hook only if the program works," said Jeffrey B. Liebman, a Harvard University public policy professor who wrote a report last year on social-impact bonds.
Some observers have raised concerns about injecting private profit-making into what they consider to be the government's job. Even advocates caution that the approach doesn't suit all social problems.
"This is a mechanism that could potentially mobilize more money to solve more problems in the short term. But we certainly need to be thoughtful about what implication this has in the longer term" about the role of government, said Antony Bugg-Levine, the CEO of the Nonprofit Finance Fund. It leads an effort to share and generate information about social impact bonds and advised New York City on its effort.